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ICICI Bank Lowered to Underperform

On May 31, 2013, we downgraded our long-term recommendation on ICICI Bank Ltd. (IBN) to Underperform from Outperform. Though the company’s fiscal fourth-quarter results were impressive, deterioration of credit quality was the primary reason for lowering the recommendation.

Why the Downgrade?

Despite ICICI Bank’s improving asset quality in the last few quarters, its credit quality metrics still lag in comparison to its industry peers. We expect the pressure on asset quality to persist, given the company’s increased proportion of higher margin (and higher risk) unsecured loans in its portfolio mix.

Further, estimates over the past 60 days have been declining, with the Zacks Consensus Estimate for fiscal 2014 going down 4.2% to $3.16 per share. With the Zacks Consensus Estimate falling, ICICI Bank now has a Zacks Rank #4 (Sell).

Other Areas of Concern

Increasing operating expenses is another plausible concern for ICICI Bank, as it is expected to drag the company’s bottom line in the upcoming quarters. We expect the company’s widening branch network, together with high inflation to keep operating expenses high in the near term.

Additionally, a changing regulatory landscape could adversely affect ICICI Bank’s growth. The company’s ability to offer loans and grow business may be limited by regulatory restrictions on capital adequacy.